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Mendoza public debt crisis us

On 8 March 2017, Professor Enrique G Mendoza, Presidential Professor of Economics at the University of Pennsylvania, delivered his lecture ‘The Public Debt Crisis of the United States’ at the European University Institute (EUI).

Hosted by the EUI Economics Department and the Robert Schuman Centre, the lecture formed one of a series of events staged by ADEMU, which also include workshops, conferences and seminars held across Europe.

Professor Mendoza’s lecture examined the five debt crises the United States has experienced since the birth of the republic, defined as year-on-year increases in net federal debt in the 95-percentile.

Mendoza public debt crisis us

1.
The Public Debt Crisis of the
United States
Enrique G. Mendoza
University of Pennsylvania, NBER & PIER
Public Lecture at ADEMU, European University Institute
8 March 2017
Florence, Italy

2.
What debt crisis?
• Five debt-crisis episodes since 1790 (annual increases
in net federal debt in the 95-percentile).
• Great Recession is 2nd largest, and the only one in
which primary deficits persist six years later and are
expected to persist at least through 2026.
• Persistent deficits sharply at odds with surpluses that
contributed to reverse all debt spikes in U.S. history
• …much worse if we add unfunded liabilities: 20% of
GDP from state+local govs. (Lutz & Sheiner (14)), 93%
of GDP from social sec.+medicare (Moody’s (16))

6.
What fiscal expansionists say
• High debt is not a concern, more debt is
desirable in order to:
1. Finance fiscal expansions to fight protracted
recessions, deflation, stagnation
2. Satisfy strong demand for “safe assets”
3. Take advantage of low (negative) borrowing
costs, making expansionary fiscal policy even
more appealing

7.
Four arguments to the contrary
1. Empirical evidence: Fiscal multipliers are negative & debt
sustainability conditions break at high debt ratios.
2. Unpleasant fiscal arithmetic: DGE model shows that max
of dynamic Laffer curves is below what is needed to restore
solvency and there are large international spillovers.
3. Debt demand instability: Strong global demand for U.S.
debt may be transitory result from globalization in
environment in which U.S. has more developed fin. markets
& larger expected gov. financing needs
4. Domestic default risk: Surges in domestic public debt often
end in default (even outright). Governments may choose
this “optimally” if “regressive redistribution” exceeds social
value of debt (liquidity, self-insurance, risk-sharing)

30.
Conclusions
1. 1st or 2nd largest debt crisis in U.S. history, and the
only one with persistent primary deficits
2. Zero or negative fiscal multiplier, and changed debt
dynamics predict much higher long-run debt
3. Capital taxes cannot make debt sustainable (labor
taxes, entitlement cuts politically difficult) &
incentives for tax competition are strong
4. Strong world demand for U.S. debt should not be
viewed as structural base for debt sustainability
5. In light of the above, risk of “benevolent” domestic
default (de facto or de jure) cannot be ignored